Honey, I Shrunk the Money Supply

August 10, 2023 | Eddie Arrieta, Research Associate

M2 money supply, as defined by the Federal Reserve, includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers’ checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds. M2 rapidly increased throughout 2020 and 2021 amid COVID-related monetary stimulus, to a peak of almost $22 trillion in July 2022. As the economy reopened and inflation accelerated — with headline CPI hitting a peak of 9% year-over-year in June 2022 — the Fed responded with a series of rate hikes and quantitative tightening measures. The result has been a rapid decrease in the money supply, with M2 down 3.6% year-over-year as of June 2023. The effects of the swift reduction in M2 have likely only begun to be felt, but a continued contraction — facilitated by higher-for-longer rates and continued quantitative tightening — could help cool inflation further and contribute to a soft landing for the economy.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Eddie Arrieta
Research Associate

Get to Know Eddie

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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